Framework: An Integrated Approach to Portfolio, Program and Project
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IV. TOTAL COST MANAGEMENT ENABLING PROCESSES - CHAPTER 11 - ENABLING PROCESSES
11.5 Value Management and Value Improving Practices (VIPs)
As with quality, there is no value management process in TCM. That is because, as with quality management (see Section 11.4), TCM, including strategic asset management and project control, is a value management process that focuses on value while recognizing that costs, broadly defined, are often the best measure of value or worth. However, while there is no separate value management process, there are many practices included in or related to TCM that are value improving practices (VIPs) in that they have a specific focus and/or significant effect on getting the most value from the process.
Some would call a practice a VIP only if it meets criteria that set the practice apart from "business as usual." For example, some criteria to be considered a VIP may include:
a formal, planned process with assigned responsibilities
a facilitated effort led by an independent practice expert
involves all the key stakeholders
documents, communicates, and follows up on the results
Generally, VIPs should consider cost over the life cycle of the asset and project (see Section 2.1) because the ultimate goal of most enterprises is long term profitability. VIPs must also be used in the early design and planning phases because the ability to influence value diminishes rapidly as scope definition and design progress. Figure 11.5-1 illustrates this concept, which is called the influence curve.
Figure 11.5-1. The Influence Curve
.1 The Relationship of Cost and Value
Lawrence D. Miles, the founding authority on value analysis and engineering, stated that the "best value is determined by two considerations: performance and cost." This statement recognizes that customers rarely are willing to pay any cost for performance and if customers can get the performance at no cost, they will almost certainly be most satisfied. However, very little is free, and in a competitive environment, the goal is usually to obtain equal or better performance at a lower cost than before and at a lower cost than the competition in consideration of risk.
Performance measures are central to the TCM process, starting with the requirements elicitation and analysis process (Section 3.1), which translates customer and stakeholder needs and wants into performance requirements. Any practice after that which can obtain the same performance at lower costs is a value improving practice.
.2 Value Analysis and Value Engineering (VA/VE)
Of all the processes in TCM, VA/VE is the most cogent to value and value management. As defined in Section 7.5, VA/VE is "the systematic application of recognized techniques which identify the functions of the product or service, establish the worth of those functions, and provide the necessary functions to meet the required performance at the lowest overall cost." Given that functions are attributes of an asset or project that give it a purpose and make it useful or desirable (i.e., anything that provides what a customer wants or needs), VA/VE is arguably the most important VIP as it is directed straight at the issue of value.
.3 Other Value Improving Practices (VIPs) in TCM
While all TCM processes are important to managing value, the TCM process includes several processes and methods besides VA/VE that are generally recognized as being most central to value management. As mentioned before, some may have criteria for performing a practice before it is label it as a VIP.
Requirements Elicitation and Analysis
Understanding performance requirements of the customer and stakeholders, as described in Section 3.1, is a prerequisite to improving both quality and value. In practice, some enterprises may apply and label requirements elicitation practices as a specific VIP to put special emphasis on a particular aspect (e.g., classes of facility quality evaluations in the process industries).
Target Costing and Cost Deployment
As described in Section 3.2, these methods have improved traditional design and planning by making cost a consideration in design (i.e., a requirement or constraint) from the very beginning rather than leaving it until the last step when it is often too late to give it proper attention.
As described in Section 3.3, decisions are generally based on analyses that translate values to monetary measures. To the extent that values are consistently and properly analyzed, this process leads to better decisions based on those values.
Life Cycle Costing (LCC)
As described in Section 3.3, decision analysis should examine the life cycle costs, which include the investment (e.g., acquisition, production, construction, etc.), operation, maintenance, use, and disposal of an asset or project. Most VIPs end with making decisions on alternative courses of actions, and therefore should apply LCC methods.
As described in Section 7.6, risk is the same as uncertainty and includes both opportunities and threats. The risk management process is very similar to VA/VE with the exception that risk management is focused on "risk factors" rather than functions. It tends to be more focused on uncertain extrinsic influences on an asset or project rather than their more deterministic intrinsic properties and function.
The schedule planning and development process (Section 7.2), cost estimating and budgeting process (Section 7.3), and investment decision making (Section 3.3) process include steps or methods for optimization. These steps often involve simulation using modeling techniques. The value equation of achieving performance at the least cost is inherently suited to these methods, which seek optimal solutions. Optimization may also be applied to costs for specific elements of a design (e.g., energy optimization for a chemical process).
The asset assessment process (Section 6.1) includes benchmarking, which is a measurement and analysis process that compares practices, processes, and relevant measures to those of a selected basis of comparison (i.e., the benchmark) with the goal of improving performance. Value is improved if performance is improved at less or no extra cost.
Review and Validation
Each TCM process includes a review and validation step that in part assures that the process and its outcome meet the established performance requirements, which often include cost and schedule requirements (e.g., target costs, milestones, etc.). In that sense, the review can be considered part of a value assurance process.
.4 Other Value Improving Practices (VIPs)
There are many VIPs not explicitly included in the TCM process because they are more closely related to design, construction, operations, or other work processes. However, as VIPs, they are inherently important to TCM and its focus on value.
Arguably, cost engineers, or someone with equivalent skills and knowledge, should play a key role in all VIPs because they all result in decisions based on best value, which by definition is a function of cost. To include those knowledgeable about performance, but exclude those most knowledgeable about value and cost, is folly.
One group of VIP methodologies involves analyzing "abilities," specifically how "executable" a project or work process is and how "operable" or usable the resultant asset, product, or service is. Some of the more widely used methods are manufacturability and constructability analyses, which are focused on execution, and reliability, availability, and maintainability (RAM) analysis, which is focused on operations. Their common goal is to find the best value alternative approach. They are similar to VA/VE except the focus is on the relation between design and how a process is performed (an ability). Some common principles apply for each of these methods including:
always consider safety
use a formal, focused analytic process
apply the method early in the design process
involve all the key stakeholders
evaluate the applicable life cycle cost (LCC)
document, communicate, and follow up on the results
Manufacturability is used during asset planning to optimize product and production system design in consideration of the effective performance of manufacturing and related activities. Alternate materials, manufacturing technologies, and standardization are key considerations (e.g., use common parts for different products).
Constructability is used during construction project planning and it involves methods to optimize the design in consideration of the effective performance of construction activities. Alternate materials, unique construction sequencing (i.e., activity logic), and construction technologies are key considerations.
Reliability, Availability and Maintainability (RAM) Analysis
RAM is used primarily during asset planning. It involves using quantitative methods to optimize the performance or operation (i.e., operability) of process systems and their components. RAM methods generally employ predictive modeling and simulation that consider future asset performance.
The above are some of the more common VIPs. However, the same concepts can be applied to analyzing the value of any process. For example ,designability analysis would examine the value of using alternate design technologies (e.g., 3D CAD) in consideration of the scope of what was being designed, biddability analysis could examine the value of alternate procurement or contracting bidding approaches in consideration of the scope of the bid package, and so on.
The list of practices that could be labeled VIPs is nearly endless. It is important to keep in mind that no project can or should apply all of them; analysis tends to yield diminishing returns and uses limited resources ineffectively. The use of VIPs should be prioritized and carefully planned.
11.5.2 Key Concepts for Value and Value Management
This chapter touches on a few key value and value management principles that guided development of the TCM process. A key point of this section is to highlight that value management is not a separate process, but a way that processes should work. TCM is a value management process. Another key point is the relationship between value, performance, and cost; you improve value when you get the required performance at a lower cost.
The following concepts and terminology described in this section are particularly important to understanding the value and value management in relation to TCM:
.1 Value Improving Practices (VIPs). (See Section 11.5.1)
.2 Influence Curve. (See Section 11.5.1)
.3 Performance Requirements. (See Section 184.108.40.206)
.4 VA/VE. (See Sections 7.5 and 220.127.116.11)
.5 Life Cycle Costs. (See Section 18.104.22.168)
.6 Manufacturability. (See Section 22.214.171.124)
.7 Constructability. (See Section 126.96.36.199)
.8 Reliability, Availability, Maintainability (RAM). (See Section 188.8.131.52)
.9 Operability. (See Section 184.108.40.206)
Further Readings and Sources
Most references on value management are focused on VA/VE (see references in Section 7.5). There are currently no books devoted to the topic of VIPs as discussed in this section.
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